We never seem to learn – bubbles bursting, WeWork edition
Every bubble produces its own poster children. One of the more astonishing is WeWork – a company that promised to defy the gravity of conventional real estate transactions by leasing long-term and renting short-term. At one point, it was valued at $47 billion – now it is warning that it may no longer be considered a “going concern.” How did we get here?
Inspiring vision and great timing
Back in 2020 I had suggested that WeWork and a whole bunch of other highly valued startups were basically a re-run of the dot.com debacle of the late 1990’s. If something is not sustainable, eventually the end will come. And so it seems we are looking at the end for WeWork. Let’s review.
Adam Neumann and Miguel McKelvey came out of the Great Recession with a business concept – “swanky” office spaces that could be rented out to nomadic workers, originally calling the company Green Desk. After three years of meteoric growth (and great timing), they sold that company to the building’s owner and plowed the proceeds into the business now known as WeWork. As Neumann said in 2011, “The next decade is the 'We' decade, where collaboration is the future of innovation. This generation watched big companies crumble. They have seen regimes overthrown by Facebook pages. If you look closely, we're already in a revolution. We want to make it positive."
What was once hailed as a transformative force in the world of real estate and shared workspaces is now a poster child for the excesses of the 2010’s, fueled by cheap money and a long economic expansion. Among other things was the lack of understanding of the transient advantage phenomenon - WeWork's initial success masked the ease with which competitors could replicate its model. The IWG Group, operating as Regus, invented the market decades ago, and WeWork didn’t innovate much beyond the fancy architecture and free beer. Flush with investor cash, it was able to out-bid rivals for great spaces (for a while).
The Intoxicating promise of exponential growth
WeWork's initial ascent was nothing short of spectacular. Neumann painted a picture of a global network of interconnected spaces where individuals and businesses could flourish together, transcending the mundane confines of traditional offices.
WeWork further tried to extend its reach into spaces beyond the office in a series of ill-considered ventures into spaces where, if we’re being honest, there didn’t seem to be any real customer need.
For instance, as the New York Times noted, “After first pledging to upend the way people worked, WeWork vowed to change how they lived: WeLive, a sleek dormitory for working professionals with free beer, arcade games in the laundry room and catered Sunday dinners, would spread around the world.” It didn’t work out like that and the venture shut down in 2021. Then there was WeGrow, a stab at reinventing the educational experience, a passion project of Neumann’s wife, Rebekah. That didn’t work out so well, either. Then there was the ultimately doomed acquisition of Spacious, a company that rents out spare space in restaurants. Executives at Conductor, a content marketing and SEO company ended up buying it back from WeWork. Without a core business on an even keel, these distractions sucked up even more money.
A governance nightmare
WeWork's governance structure was weak to non-existent, with Neumann wielding disproportionate power that allowed him virtually unchecked authority. Questionable transactions and conflicts of interest flourished. Neumann's grip on the company, combined with his penchant for unorthodox practices, became a red flag for later investors. Among many dubious decisions was the choice for a profitless company to buy a $60 million private jet, later unloaded when Neumann’s turn as CEO came to an end.
There were also blatant attempts to misguide the investing public as to how the firm was actually doing. Among the fun mechanisms was a thing called “community adjusted” EBITDA, as Andrew Ross Sorkin seeks to understand (unsuccessfully).
How not to do an IPO
By 2019, it was starting to sink in for some investors that putting endless amounts of capital at the disposal of ambitious entrepreneurs with big growth plans and zero profit plans was perhaps not such a good idea. As observer David Trainer put it in Forbes, “WeWork might not be the largest IPO of 2019, but it is easily the most ridiculous, and the most dangerous. At least, Uber and other recent big-money IPO’s offered some legitimate innovation in their business models even if their valuations were far too high. WeWork has copied an old business model, i.e. office leasing, slapped some tech lingo on it, and suckered venture capital investors into valuing the firm at more than 10x its nearest competitor. The company also burns tons of cash, carries huge risk factors in a recession, and sports some of the worst corporate governance practices I’ve ever seen. WeWork (WE) is in the Danger Zone.” At the time, the IWG group, operating as Regus, actually made a profit and was valued at around $3.7 billion (versus the heady $47 billion valuation sought for the WeWork IPO).
The media played a significant role in unraveling WeWork's narrative. A series of investigative articles and reports highlighted the company's extravagant spending, erratic management decisions, and questionable business practices. The negative publicity further eroded confidence in the company's leadership and added to the downward pressure on its IPO prospects.
In light of these mounting challenges, WeWork's leadership ultimately made the decision to cancel its IPO in September 2019. Within a year, its valuation went from $47 billion to $8 billion, it was so short of cash that it had to delay letting staff go because it couldn’t afford the severance packages and Adam Neumann was ultimately bought out (for $1.7 billion plus an eye-popping consulting agreement).
The drama of all this (you really can’t make this stuff up) was so delicious that Apple + made a movie out of it, framing it as a love story!
The movie gets more sober from here
The company did eventually go public via a Special Purpose Acquisition Company (SPAC) in 2021. That deal valued it at $9 billion. The pandemic both hurt and helped it. With people working at home, short-term office stays dropped like a rock. But in the rebound, flexible office space started to look sexy again.
The company at the moment has a Board member as its interim CEO, three other board members who have stepped down and it is reporting “substantial doubt” about its ability to continue as a going concern. It is likely to be able to limp along for a while, as no one with current leases is going to want to push the company into bankruptcy.
As always in such tales, there are untested assumptions, taken as facts, big bets on a specific, unproven idea, leaders with nearly magical abilities to weave a great narrative, and hot money looking for a killing. Not that Neumann (who did very nicely from the proceeds of all this, thank you) did anything illegal, as far as is known. He and early equity owners were able to cash out. The bankers who managed the various transactions probably earned a sweet return for their time as well.
The losers? Current equity holders (aka the public). Current users (over 700,000 of them, as of this writing), who might not get their money back if WeWork cancels their underlying leases. Vendors with outstanding bills. Downtowns which will see even more turmoil in their central business districts. And, perhaps, we’ll see more caution about the lure of a buzzy startup wrapping an old business model in tech clothing and seducing people into supporting it.
We’re fans of the WeWork concept over here at Valize, just not of the economics. We hope they are able to pull off the miracle they seem to need. In the meantime, for the rest of us, we’d be happy to chat about your startup, growth or innovation challenges. Our contact form is here.